Monday, September 28, 2020

Moody’s “Okays” Botswana’s debt level

Botswana has been given thumbs up for its strong balance sheet, net external creditor position and low debt burden. The country’s credit assessment was done by Moody’s, one of the global leading credit ratings agencies.

In its report titled “Government of Botswana ÔÇô A2 stable, Annual Credit Analysis” released Wednesday, the agency expects real GDP to expand by 4.5 percent on average between this year and 2019 on the back of sustained recovery in the diamond sector and expansionary fiscal policy ahead of the 2019 general elections.

Moody’s GDP forecast of Botswana follows readjustment by the country’s ministry of Finance and Economic Development which trimmed projected GDP growth for 2018 from 5.3 percent to 4.5 percent. Striking the same chord as Moody’s, the finance ministry added that the forecast growth of 4.5 percent this year would be partly dependent on a continuous rebound in the global diamond market and stability in the supply of power and water.

Moody’s positive view of the Botswana’s positive credit position was influenced by what the agency viewed as the country’s high institutional strength propped by the strong performance on the worldwide governance indicators, particularly in terms of control of corruption. The ratings agency was also impressed by Bank of Botswana’s accommodative monetary policy which they say is supported by a well-designed framework focused on inflation targeting, allowing the central bank to meet its 3 ÔÇô 6 percent objective range over the past five years.

“The government has a transparent and rule-based fiscal policy. Its fiscal strength is supported by a low debt stock, with a very small foreign-currency exposure and a strong government balance sheet. Moody’s expects general government debt to remain at around 16.0% of GDP by 2019, compared with a peak of 20.7% in 2011. The government’s cost of debt is likely to remain very low in the near term,” Moody’s noted in its annual report.

“Its fiscal strength is supported by a low debt stock, with a very small foreign-currency exposure and a strong government balance sheet. Moody’s expects general government debt to remain at around 16.0% of GDP by 2019, compared with a peak of 20.7% in 2011. The government’s cost of debt is likely to remain very low in the near term,” the ratings agency added.

The latest figures from Bank of Botswana, which covers financial statistics for the month of July shows that the country’s total external debt is P17.8 billion while the domestic debt stands at P11.1 billion, bringing total debt to P28.9 billion or 16.6 percent of the 2017 GDP value. Still, Botswana’s exposure to debt could be high than the figures provided by Bank of Botswana following president Mokgweetsi Masisi’s September visit to China that culminated in a grant of P340 million and a new loan. While the amount is yet to be disclosed, Botswana’s finance ministry said the country was seeking a P12 billion loan for infrastructure development.

Nonetheless, Moody’s says Botswana’s sound external position, modest government borrowing requirements, healthy banking system and overall stable political environment mean it has low susceptibility to event risk. The report observes that the stable rating outlook reflects Moody’s assessment of policymakers’ continued commitment to a prudent fiscal stance while utilizing some of the significant fiscal policy space.

“These credit strengths are balanced by medium- to long-term challenges to Botswana’s economic model, structural rigidities in the labour and product markets and weak governance of state-owned enterprises,” the report noted.

In a similar move to International Monetary Fund (IMF) which earlier this year called for structural reforms (export diversification, enabling environment for private sector to take lead, job creation, and efficiency of public sector), Moody’s called for structural reforms that would significantly reduce rigidities in the labour and product markets, increase economic diversification and reduce inequality, so as to boost Botswana’s growth potential, resulting in an upward pressure on the rating.

“A broadening of the tax base that reduces fiscal vulnerability to sudden declines in Southern African Customs Union revenue or mineral revenue would also be credit positive,” said Moody’s. “Conversely, the prospect of a significant and lasting erosion of fiscal reserves would put downward pressure on the rating. A lack of structural reforms that would weaken potential growth in the medium term would be also credit negative.”

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